Do good reviews help restaurants?

Do online consumer reviews affect restaurant demand? I investigate this question using a novel dataset combining reviews from the website Yelp.com and restaurant data from the Washington State Department of Revenue. Because Yelp prominently displays a restaurant’s rounded average rating, I can identify the causal impact of Yelp ratings on demand with a regression discontinuity framework that exploits Yelp‟s rounding thresholds. I present three findings about the impact of consumer reviews on the restaurant industry: (1) a one-star increase in Yelp rating leads to a 5-9 percent increase in revenue, (2) this effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation, and (3) chain restaurants have declined in market share as Yelp penetration has increased. This suggests that online consumer reviews substitute for more traditional forms of reputation…

This is the age of the consumer. One thought this prompts is that when better information allows choices that are more aligned with preferences, it will not show up directly in the consumer price index as an decrease in real prices, even though the standard of living attainable at a given income has gone up.

Say restaurant at restaurant A you can buy a util for $1, but at restaurant B you can buy 1.5 utils for $1. If you were unaware of restaurant B or believed the price of utility to be higher there, then becoming aware of it due to Yelp.com reviews decreases the real price of utils for you, and so is a decrease in your cost of living.

I won’t put forth any guestimates about how much this is worth, but it applies to at least food, arts and entertainment, housing, and automobiles.

Yeah, that is basically the worst idea I’ve ever heard. If a restaurant tried to do this, I’d probably immediately assume that they had cut out all unfavorable reviews and possibly added false favorable reviews. At the very least, I’d be extremely annoyed they hadn’t just sent me to the actual yelp page. This is also probably a violation of Yelp’s copyright.